Budget: Demonetisation may push Centre to give stimulus

Finance Minister Arun Jaitley in his Budget on February 1 may have to provide stimulus to the economy reeling under the 'Tsunami' of demonetisation, India Ratings and Research said on Wednesday. Amidst an uncertain global scenario, the Fitch Group company said that the Indian economy was cruising well till the tsunami of de-legalisation of high denomination currency hit the country.

"...the major dilemma for the finance minister in the Union Budget FY18 is –will a fresh round of fiscal stimulus be required to offset some of the ill effects of the currency de-legalisation," it said, in a report titled 'De-legalisation Tsunami May Compel Government to Provide Stimulus in Union Budget FY18'.

India Ratings estimates that GDP growth in the current fiscal will decline to 6.8 per cent from its earlier estimates of 7.8 per cent and "based on the present situation, the adverse impact may flow into 2017-18 too".

The sudden decision of demonetising Rs 500/1,000 notes and the "chaos created thereafter" due to the limited availability of new currency has caused significant disruption to the economy, it said.

The informal sector is not a standalone sector and has strong-weak linkages with the formal sector, depending on the nature of goods/services dealt in. Therefore, where business in the informal sector has come to a grinding halt or down by 30-40 per cent and beyond, it has resulted in either 'nil' or lower income generation, the agency said.

"Therefore, the ripple effect of de-legalisation is proving to be quite disruptive for the overall economic activity and employment," India Ratings said. It further said as the government embarks on preparing the budget, "the central question before it is - whether a fresh round of fiscal stimulus is required to offset some of the ill effects of currency de-legalisation".

According to the agency, Indian public finances (central, state and local bodies) suffer from committed expenditure syndrome as a large part of current expenditure is inflexible and cannot be reduced/curtailed in the short-run.

"Therefore, the fiscal room for stepping up expenditure has to either come from higher revenue collection or higher fiscal deficit. With growth expected to fall not only in FY17 but also in FY18, the government is clearly staring at lower tax collection," said India Ratings.

The headroom for the government to provide a stimulus either from the consumption side or investment side is quite limited and if a boost is to be provided then perhaps it will require compromising the fiscal deficit target and the fiscal consolidation process, it added.

India Ratings believes, the implications of the integration of the railway budget into the general budget will show an increase in capital expenditure.

'Govt may gain a meagre 72,800 cr from note ban'

Against trillions of rupees of fiscal and tax gains projected from the note ban, a domestic brokerage on Wednesday said the Government may gain only Rs 72,800 crore from the move –taxes, penalties worth Rs 32,800 crore and Rs 40,000 crore by way of surplus transfer from the RBI.

Many pro-demonetisation economists and analysts had in the early days of the move claimed at least 20 per cent of the Rs 15.55 trillion of cancelled money would not come back to the system, which in turn, could enable the RBI to write off that amount from its balancesheet. The profit accretion could then be transferred to the Government by the RBI as surplus transfer.

While the central bank had publicly cited only Rs 15.55 trillion of high value notes were cancelled on November 8, in an RTI reply to PTI, it had said the actual quantum of bills cancelled was much higher at Rs 20.51 trillion.

But according to a report by domestic brokerage Motilal Oswal, this could just be a whimper of the initial projection at Rs 40,000 crore. Which means only around 3.5 per cent of the cancelled money was not returned to the system or were black money.

The brokerage said while RBI has not provided any data on deposited notes after December 10, calculations using official data on currency in circulation and total supply of bills by December 19 show that over Rs 15 trillion has come back to the system.

"Thus, the RBI could transfer a maximum of Rs 40,000 crore to the Government, which will be included in the latter's non-tax revenue receipts for the next fiscal," the report said.

Additional taxes worth Rs 32,800 crore and non-tax revenue of Rs 40,000 crore will add Rs 72,800 crore to the Government's kitty next year, it said. But this is based on the broking firm's assessment of the cancelled money which came back to the system till December 19. So far, neither the RBI nor the Government has quantified the money that came back to the system.
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